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Index Investment and Financialization of Commodities

49 Pages Posted: 17 Aug 2009 Last revised: 21 Sep 2010

Ke Tang

Institute of Economics, School of Social Science, Tsinghua University

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 2010

Abstract

This paper finds that concurrent with the rapid growing index investment in commodities markets since early 2000s, futures prices of different commodities in the US became increasingly correlated with each other and this trend was significantly more pronounced for commodities in the two popular GSCI and DJ-UBS commodity indices. This finding reflects a financialization process of commodities markets and helps explain the synchronized price boom and bust of a broad set of seemingly unrelated commodities in the US in 2006-2008. In contrast, such commodity price comovements were absent in China, which refutes growing commodity demands from emerging economies as the driver.

Keywords: co-movement of commodities, volatility, financial crisis

Suggested Citation

Tang, Ke and Xiong, Wei, Index Investment and Financialization of Commodities (August 2010). Available at SSRN: https://ssrn.com/abstract=1455724 or http://dx.doi.org/10.2139/ssrn.1455724

Ke Tang

Institute of Economics, School of Social Science, Tsinghua University ( email )

Beijing, 100084
China

Wei Xiong (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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